CECILIA CIFUENTES Economist, director of the Center for Financial Studies ESE Business School, UAndes
One of the arguments given by advocates of introducing pay-as-you-go components in our pension system is that we would “advance” towards the social security schemes that developed countries have, most of which have added capitalization pillars to their pay-as-you-go systems. , aware that the strong demographic change makes it necessary to have multipillar systems, in accordance with the recommendations of the OECD. However, is it correct to state that due to the fact that the countries that based their pension systems on pay-as-you-go schemes are now moving towards capitalization schemes, those of us who have capitalization systems should create pay-as-you-go schemes to resemble them? The argument seems fallacious to me, if we know that the capitalization system is superior to the pay-as-you-go system. And it is in three fundamental aspects; it is sustainable in a context of population ageing, it pays better pensions, given that in the long term the return on capital is greater than the growth of the workforce, and it has a favorable impact on employment and wages, as a result of its contribution to savings , investment and growth. For some reason, countries with pay-as-you-go schemes incorporate it into their social security systems, to make them more sustainable over time, incorporating the need for future generations to also have pensions. Why then do developed countries keep their pay-as-you-go schemes within of the system? Due to the fiscal impossibility of paying pensions to those whose contributions were mainly used to pay pensions. The only viable alternative is to make a gradual process towards capitalization.
“The introduction of an intergenerational distribution component is not justified in Chile, because we have already duplicated the solidarity component, which constitutes a distribution from taxpayers to retirees.”
A different issue from the previous one is whether the capitalization system is sufficient to ensure good pensions, and certainly this system, like pay-as-you-go, is insufficient when the contribution rate and retirement age are incompatible with life expectancy. Regardless of the system used, it is clear that we must contribute more and work longer, just as the countries we want to resemble do. If we also add a high degree of labor informality and low income, especially in the first years of working life, the incorporation of a solidarity pillar becomes unavoidable. And how can we ensure that this solidarity base does not discourage contributions? Establishing a universal basic pension that makes it possible to cover the poverty line, but whose amount does not discourage saving by those who can. That is what we have in Chile already assured, non-existent in countries with our level of development. It is a great fiscal effort, which all citizens make, and which is financed in the most efficient way possible, with general taxes, and not with regressive taxes on formal work.
The introduction of an intergenerational distribution component is not justified in Chile, because we have already doubled the solidarity component, which constitutes a distribution from taxpayers to retirees. The doubling of the fiscal contribution to the solidarity pillar, in terms of resources involved, has an effect equivalent to allocating three more contribution points to distribution, therefore, what was the objective a couple of years ago has already been met. We have achieved a significant improvement in pensions in the short term, especially for women, and also with a focus on the middle class. Let us now carry out a good reform for the medium term; deepening capitalization is the best policy we can adopt.